Fed says SEC money-market rule could spark, not reduce, runs

A new Securities and Exchange Commission rule designed to reduce runs in the money-market mutual-fund industry could instead spark them, the New York Federal Reserve said Monday.

At issue is part of the new SEC rule giving funds the ability to limit outflows — through gates or restrictions to redemptions — when liquidity runs short.

New York Fed economists, in a blog post, said that a study of academic literature concludes these gates may ultimately just make investors run sooner.

“The possibility of a fee or any other measure that is costly enough to counter investors’ strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures.”

A spokeswoman for the SEC said the agency had no comment on the blog post. One SEC commissioner, who ultimately voted against the rule, raised concerns about a rush to redemption in the debate.

Fed officials do like other parts of the SEC rule, especially the fluctuation in net asset values of shares for some of the funds instead of a fixed value of $1 a share.